Question

Dr. Simon invests $80,000 in a piece of land that is expected to increase in value...

Dr. Simon invests $80,000 in a piece of land that is expected to increase in value by 14 percent

per year for the next five years. She will then take the proceeds and provide herself with a 10-year

annuity. Assuming a 14 percent interest rate for the annuity, how much will this annuity be?

PLEASE show all step by step calculations. Thanks.
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Homework Answers

Answer #1

This question applies 2 concepts of time value of money - 1 is a basic time value of money function and other is PV of an annuity concept.

Basic time value of money function says: FV = PV * (1 + r)n

Now, applying this, for the land value of Dr Simon

FV = $80,000 * (1 + 14%)5

FV = 80,000 * 1.9254

FV = $154,033.17

Now, this amount would be used to purchase a 10 Year annuity with 14% rate.

PV of an annuity is mathematically represented as:

154,033.17 = P * 0.7303/0.14

P = $29,530.24 ---> Answer

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